Supreme Court ruling on the Fair Credit Reporting Act and auto insurers' use of insurance scores to set premiums.

• Author: Allen, Robert D.

ON June 4, 2007, the United States Supreme Court resolved several questions of first impression presented in consolidated cases about how the "adverse action" notification provisions in the federal Fair Credit Reporting Act (FCRA) (2) apply to personal lines insurance underwriting. In Safeco Insurance Co. v. Burr/GEICO Insurance Co. v. Edo, (3) the Court resolved a question that presented a split in the United States Circuit Courts--the standard for "willful" noncompliance under the Act. The determination of the correct standard for a willful violation under the FCRA is a ruling significant not just to insurers, but to any business using or furnishing consumer credit information. The Burr opinion, authored by Justice Souter, declared that a willful failure to comply with the FCRA covers not only knowing violations, but also violations made in "reckless disregard" of the law. Additionally, the Court clarified that initial rates charged for new insurance policies where credit information is considered can constitute "adverse actions" thereby triggering FCRA notice provisions, and importantly, the Court set the benchmarks from which insurance adverse actions should be measured thus giving insurance companies needed clarity regarding when the FCRA's notice provisions are implicated.

1. Background

   Since the late 1990's, many insurance companies, including GEICO and Safeco, have used information in consumer credit reports as one factor in setting insurance premiums. The FCRA permits insurers to use credit reports and expressly endorses insurers' use of credit reports to achieve differentiated pricing schemes. (4).

   In 2001 and 2002, a group of consumers initiated eight putative nationwide class actions in Oregon federal district court, including the two lawsuits consolidated in Burr, alleging that GEICO and other auto insurers' adverse-action notice practices contravened the FCRA. (5) In the two consolidated cases in Burr, the putative class action plaintiffs alleged that the insurance companies had violated the FCRA by failing to send them (new insurance applicants) adverse-action notices after the companies used their consumer credit report information in setting their premium and offering them insurance at rates less than the insurers' lowest possible (best) rates. According to the plaintiffs, the failure to send them an adverse-action notice was a willful violation of the FCRA, requiring the companies to pay statutory damages of $100 to $1,000 per class member.

   The FCRA requires notice to any consumer who is subjected to "adverse action ... based in whole or in part on any information contained in a consumer [credit] report." (6) With respect to insurance companies, [section] 1681a(k)(1)(B)(i) of the FCRA describes an adverse action as "a denial or cancellation of, an increase in any charge for, or a reduction or other adverse or unfavorable change in the terms of coverage or amount of, any insurance, existing or applied for." A negligent failure to provide the statutory notice can result in liability for actual damages; a "willful" failure can give rise to liability for actual damages or statutory damages ranging from $100 to $1,000 per violation, as well as punitive damages. (7)

   The United States District Court for the District of Oregon granted summary judgment in favor of the insurance companies. (8) On appeal, the United States Court of Appeals for the Ninth Circuit held that an adverse action has occurred and a notice is required in all circumstances where a consumer would have received a lower rate if the consumer had a better credit score. (9) The Ninth Circuit also held that an insurer "willfully" fails to comply with FCRA where it acts with "reckless disregard" for the rights of a consumer. According to the Ninth Circuit, "reckless disregard" includes a "deliberate failure to determine the extent of [a company's] obligations," "reliance on creative lawyering that provides indefensible answers," or reliance on "implausible interpretations." (10) In adopting a "reckless disregard" standard, the court split with several other circuit courts that had defined "willful" as a "knowing" violation.

   Both Safeco and GEICO sought certiorari in the Supreme Court in two separate cases: Safeco Ins. Co. of America v. Burr, No. 06-84 and GEICO Gen. Ins. Co. v. Edo, No. 06-100. The Court granted the Petitions for Writ of Certiorari and consolidated the cases. In the Ninth Circuit, after briefing, GEICO's appeal was consolidated for disposition with a similar case brought against another insurer, Hartford Financial Services Group, Inc., resulting in the Ninth Circuit's opinion, Reynolds v. Hartford Financial Services Group, Inc. (11)

2. The Burr Decision--The Main Holdings

   Three main questions were decided in Burr: (1) whether there can be an insurance "adverse action" when credit information is used in setting the initial premium for a new insurance policy; (2) what is the "benchmark" from which an adverse action is measured thereby triggering the FCRA notice provisions; and (3)what is the standard for determining "willfulness" under the FCRA--does it encompass only knowing violations or does it include violations made in "reckless disregard" of the statute?

   1. An "Adverse Action" in Determining Insurance Premiums Includes Setting First-Time Insurance Rates: New Policyholders are Entitled to Notification Under the FCRA.

      Before determining whether the companies acted recklessly, the Court had to answer the antecedent question of whether either company violated the adverse-action notice requirement at all. Because the plaintiffs' claims in both cases were premised on initial rates charged for new insurance policies, there could be no adverse action unless quoting or charging a first-time premium is "an increase in any charge for ... any insurance, existing or applied for." (12) In the Safeco case, Safeco had not given the plaintiff an adverse-action notice on the basis that the adverse-action notice provisions of the FCRA did not apply to initial applications for insurance. (13) In Safeco's case, the District Court had held that the initial rate for a new insurance policy cannot be an "increase" because there was no prior dealing between the insured and the insurer. As amicus curiae before the Supreme Court, the United States Government argued that the regular use of the term "increase" was broader than the District Court had held and that new business customers could suffer an "increase" in their insurance premium based on the consideration of credit information even though there were no prior dealings (no previous premium) between the insured and insurer.

      The Supreme Court held that the Government's reading "better fit with the ambitious objective set out in the Act's statement of purpose, which uses expansive terms to describe the adverse effects of unfair and inaccurate credit reporting and the responsibilities of consumer reporting agencies." (14) The Court pointed out that "the newly insured who gets charged more owing to an erroneous report is in the same boat with the renewal applicant." (15) "[T]he 'increase' required for 'adverse action,' (15) U.S.C. [section] 1681a(k)(1)(B)(i), speaks to a disadvantageous rate even with no prior dealing; the term reaches initial rates for new applicants." (16) Thus, because Safeco did not give the plaintiffs (initial applicants) an adverse-action notice, this would be a violation of the statute if the plaintiffs received higher rates "based in whole or in part" on their credit reports. (17) The Court concluded, however, that in this particular case, even if Safeco had violated the statute, such violation was not in reckless disregard of the statute. (18) Thus, the insurance adverse-action provisions of the FCRA do apply to new insurance applicants, and...